The first U.S. listed closed end fund for marketplace lending, a collaboration between UBS, Van Eck and Overland, files with the SEC.

Last week a new player emerged on the marketplace lending scene. A Form N-2 registration was filed with the SEC by Van Eck Overland Online Finance Trust to form a new, publicly traded closed-end fund. UBS, the world’s largest wealth management firm, was named as lead manager.

I have known Alex Dunev from UBS for quite some time. Alex leads UBS’ coverage of marketplace lending, so when I discovered this filing we, along with Steve Pierson, UBS’ Global Head of Financial Technology, had a phone conversation to discuss the offering.

The First Publicly Traded Closed-End Fund

The Van Eck Overland (“VEO”) closed-end fund will be the first listed closed-end fund that invests primarily in loans originated by online lenders. Van Eck is an investment management firm that has a long history with mutual funds and ETFs. Overland Advisors will be the sub-advisor of this fund with Peter Sterling as the portfolio manager. Sterling has been investing in marketplace lending for some time as the President of the Overland Direct Yield Fund. Alex Dunev commented:

The Van Eck and Overland partnership is very powerful. Both were early investors in marketplace originated loans so their knowledge of the market combined with their individual skill sets is highly complementary. UBS is thrilled to be working with them to help to structure and launch the industry’s first US-listed permanent capital vehicle.

Unlike the RiverNorth offering (another closed end fund that I will be profiling when they launch), the VEO fund will be publicly traded from day one. This is how it will work. Once they get the go ahead from the SEC they will raise money through the IPO of the fund. Because the offering is a “best efforts” they could not comment on how much they may raise but we do know what similar funds have raised in the UK.

The first publicly traded fund, P2P Global Investments (P2PGI) raised £200 million in its launch last year on the London Stock Exchange (they have since raised another £650 million). Two other funds that launched in the UK this year, VPC Specialty Lending and Ranger Direct Lending Fund raised £200 million and £155 million respectively. So, it is likely that the VEO fund will raise in the low hundreds of millions dollars.

The VEO fund IPO will be the first of its kind on an American exchange. This is good news after the first three publicly traded funds in our industry all launched in the UK.

Once the IPO closes shares will be begin trading on the exchange. The main difference between a closed-end fund and a regular open-end mutual fund is that a closed-end fund is closed to new capital after it begins operating. Shares are traded on an exchange and may trade at a premium or discount to the net asset value of the fund. The fund may raise additional capital in the future through a secondary offering or a rights offering.

A Diversified Fund for Investors in All 50 States

The fund will likely employ leverage. The prospectus states that the leverage can be up to 33.3% of the managed assets which equates to 50% leverage, a relatively modest amount when compared to many of the hedge funds operating today. But that is a good thing given this will be a publicly traded security open to small investors.

While the N-2 did not disclose which platforms the fund will be investing in, it is safe to say that given the numbers involved larger platforms will be the focus. The prospectus states that the VEO fund may invest in consumer loans, small business loans, student loans, real estate and other types asset classes as well. It may also invest in loans originated by platforms that reside outside the United States.

So, the VEO fund will be a diversified fund with a mandate to invest in the loans issued by multiple platforms and will give retail investors access to a diversified portfolio of both loans and platforms with one investment. There is no word on expenses yet, we will need to wait for the IPO to see how much this will cost investors. But being a publicly traded security it will be available to investors in all 50 states.

My Thoughts on the Closed-End Fund

It was inevitable that some kind of mutual fund would come to this industry as it matures. Frankly, I am surprised it hasn’t happened before this. After all, P2PGI launched over a year ago now in London.

The launch of both the RiverNorth and VEO funds is a good thing for this industry. It allows more investors, regardless of which state they live in, to participate and it provides permanent capital for the platforms. It should help fuel the continued rapid growth of this industry.

Comments

A couple months back, there was chatter about MLP-backed ETFs, but an obvious operational issue is the need to have active market making for the creation/redemption process. A traded close-end fund backed by three well-respected names bypasses this problem, and is a great vehicle for retail investors to participate in this asset class.

No, we will not know the ticker for some time. The filing is in the hands of the SEC now and most people think best guess as to when it begins trading is 2-3 months. I will have more here when it launches.

I do not view this as a positive development. It provides a new way to invest, and at the same time PAY MORE FEES. Smart investors do not pay extra fees. It will make it easier for many to invest, which will increase demand, and make it more difficult for those of us who invest directly. Overall, this sort of thing just drives down our return.

Fred, I don’t disagree with you. For investors like you this is not good news, it does nothing for you and it won’t help your returns.

I look at this more from an industry perspective. The vast majority of the investing public does not want to manage their own investment. They want and need someone else to do that. This closed end fund provides a way for them to do it. Fees are going to be an issue but I think even with relatively high fees a fund like VEO will be successful.

Did you get into a discussion on how taxes will work? For example, how will charge offs be treated? Will fund expenses and cost of leverage be netted against the return the investor receives? As you are probably aware, leverage in a partnership type structure has some negative tax implications.

This fund has not launched yet and neither has the RiverNorth fund I mentioned. This is proving to be a longer process than anyone expected. I will be sure to cover the launch of both funds when they finally do launch which will hopefully be in Q1 2016.

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